Rasmussen v. Commissioner

• Decision Date: 08 April 1992
• Docket Number: Docket No. 27736-88.,Docket No. 14548-87.,Docket No. 27744-87.
• Citation: 63 T.C.M. 2710
• Parties: Tommie N. Rasmussen and Mary Ann Rasmussen, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

63 T.C.M. 2710

T.C. Memo. 1992-212

Tommie N. Rasmussen and Mary Ann Rasmussen, et al.¹ v. Commissioner.

Docket No. 14548-87.

Docket No. 27744-87.

Docket No. 27736-88.

United States Tax Court.

Filed April 8, 1992.

A. Jerry Busby, 2525 E. Arizona Biltmore Circle, Phoenix, Ariz., for the petitioners. Marikay Lee-Martinez, for the respondent.

Memorandum Findings of Fact and Opinion

DAWSON, Judge:

These cases were assigned to Special Trial Judge Pate pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183.² The Court agrees with and adopts the opinion of the Special Trial Judge which is set forth below.

Opinion of the Special Trial Judge

PATE, Special Trial Judge:

In these consolidated cases respondent determined deficiencies in petitioners' Federal income taxes, additions to tax, and increased interest, as follows:

                                 TOMMIE N. RASMUSSEN AND MARY ANN RASMUSSEN
                                                                           1983      1984
                Deficiency ............................................   $ 6,983   $14,176
                Additions to tax
                and increased interest
                  section 6653(a)(1) ..................................       349       709
                  section 6653(a)(2) ..................................      1 1
                  section 6659 ........................................     2,095     4,253
                  section 6661 ........................................      2 2
                  section 6621(c) .....................................      3 3
                

                                 DONALD B. HORNE AND MARJORIE S. HORNE
                                                                             1983         1984
                Deficiency ............................................   $11,832.80   $ 7,787.60
                Additions to tax
                and increased interest
                  section 6653(a)(1) ..................................       591.64       389.38
                  section 6653(a)(2) ..................................      1 1
                  section 6659 ........................................     3,373.14     2,236.28
                  section 6661 ........................................      2 2
                  section 6621(c) .....................................      3 3
                1 50 percent of the interest due on the deficiency
                2 Applies to that portion of the deficiency to which section 6659 is not applicable
                3 To be determined
                                           RICHARD BESSERMAN AND ROSALIE BESSERMAN
                                                                             1983         1984
                Deficiency ............................................   $12,220.00   $ 3,312.35
                Additions to tax
                and increased interest
                  section 6651(a)(1) ..................................                    496.25
                  section 6653(a)(1) ..................................       611.00     1,435.32
                  section 6653(a)(2) ..................................      1 1
                  section 6659 ........................................     3,367.50       993.71
                  section 6661 ........................................      2            --
                  section 6621(c) .....................................      3 3
                1985
                Deficiency ............................................   $ 2,630.35
                Additions to tax
                and increased interest:
                  section 6653(a)(1) ..................................       131.52
                  section 6653(a)(2) ..................................      1
                  section 6659 ........................................       789.11
                  section 6661 ........................................      --
                  section 6621(c) .....................................      3
                1 50 percent of the interest due on the deficiency.
                2 Applies to that portion of the deficiency to which section 6659 is not applicable.
                3 To be determined.
                

These cases were consolidated for purposes of trial, briefing, and opinion. They were chosen as test cases to determine the deductibility of certain losses and investment tax credits taken in connection with a series of transactions known as the Agbanc Donor Cow Program (hereinafter the Agbanc program). The issues for our decision are: (1) Whether the Agbanc program had economic substance and business purpose and, therefore, whether the losses and the investment credits attributable thereto should be recognized for Federal income tax purposes; (2) if so, the proper amount of income, deductions, and investment credit to be taken into account by each petitioner; (3) if so, whether the provisions of section 465 apply to limit the amount of loss deductible by any of the petitioners; (4) whether petitioners are subject to the various additions to tax determined by respondent; and (5) whether the Agbanc program was a tax motivated transaction within the meaning of section 6621(c).

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and the stipulated exhibits are incorporated herein by this reference.

Tommie N. Rasmussen and Mary Ann Rasmussen (hereinafter the Rasmussens) were residents of Arizona at the time they filed their petition in this case. Donald B. Horne and Marjorie S. Horne (hereinafter the Hornes) were residents of Texas at the time they filed their petition, and Richard Besserman and Rosalie Besserman (hereinafter the Bessermans) were residents of Arizona at the time they filed their petition.

The Agbanc Program

Agbanc Ltd. (hereinafter Agbanc), is an Arizona corporation formed in 1983 to structure and manage cattle programs, acquire breeding cattle, manage farms and ranches, conduct feasibility studies, and merchandise cattle. In this regard, it conceived and promoted the Agbanc program, which stated that its objective was to breed purebred³ Simmental cattle in order to develop genetically superior herds. Agbanc's only venture was the Agbanc program offered in 1983.

The Agbanc program was promoted by two corporations, Ambanc, Ltd. (hereinafter Ambanc) and Agbanc, both of which were controlled by John McDonnell. Ambanc's letterhead stated that it acted as a "sales consultant on tax oriented financing". On August 1, 1983, Ambanc entered into a contract with Agbanc, whereby Agbanc agreed to pay 35 percent of its gross income (but in no event less than $30,000 per month) to Ambanc for consulting services with regard to the various undertakings of Agbanc.

In its Individual Animal Offering (hereinafter offering memorandum), Agbanc offered 200 purebred Simmental virgin heifer cows for sale to a maximum of 200 investors. The purchase price of each cow was $69,000, payable $6,900 down, and the balance of $62,100, evidenced by a nonsecured full recourse promissory note bearing interest at the rate of 9.93 percent per year, payable annually in the following principal amounts plus interest: $11,518 due June 30, 1984, $12,662 due June 30, 1985, $13,920 due June 30, 1986, and $24,000 due June 30, 1987. This payment schedule required equal annual payments of $17,684 for each of the first 3 years. Agbanc could not assign, sell, or otherwise dispose of this note without written approval of the investor.

In the offering memorandum, Agbanc stated that:

The $69,000 purchase price has been fixed by Agbanc and is not subject to negotiations or modification, though appraisal has established the fair market price of such animals used in an embryo program to be significantly above the offering price. * * * Agbanc is of the view that the purchase price reflects each animal's fair market value.

An Appraisal prepared by Karney J. Redman (hereinafter Redman), also included therein, represented that each cow in the program was capable of producing an average of $65,000 of income per year from the sale of progeny and embryos and, consequently, was worth between $75,000 and $85,000. He qualified the appraisal, however, by stating that:

It is our understanding that each of these cows will be used in a program to generate embryos for transplant. If for some reason a particular cow was not used in such a program, you should be aware that our appraisal would change accordingly.

The specific animals offered by Agbanc were selected by TCR based upon the "linear measurement valuation" method developed by Redman. This method was developed to aid in the selection of genetically superior animals with emphasis placed on pedigree, confirmation, performance, and past performance. It uses the physical linear measurements of the animal to assess and evaluate the cow. Agbanc represented that the linear measurement valuation method provided the most effective system for selecting genetically superior animals.

To each of the investors purchasing a cow, Agbanc offered a 3-year lease agreement with Therriault Creek Ranch (hereinafter TCR), a corporation running a ranch located in Eureka, Montana. TCR was family owned and, at the time of the offering, had conducted a ranching operation for several years. It started a Simmental breeding program and hired Ambanc, paying it $17,500, to structure the Agbanc program.

TCR agreed to breed the Agbanc cows utilizing embryo transfer technology. The technology of embryo transfer is a process by which a breeder flushes embryos from a genetically superior donor cow, which then are transplanted into other lesser quality recipient cows (surrogates) who carry the calves to term. The purpose is to increase the yield of a genetically superior cow, who normally would produce only nine to ten calves in her lifetime.

The embryo transfer process entails the superovulation of a donor cow. To increase the number of eggs a cow normally produces, she is injected with a series of hormone shots. At her next heat, approximately 5 days later, she is bred by artificial insemination using semen from a superior bull. Six to eight days later, the fertilized eggs are flushed from her and observed under a microscope to assure normality. If a recipient cow is ready, the embryo can then be implanted in her reproductive tract and she carries the calf to term. If a recipient cow is not immediately available or is not in exactly the same estrous cycle as the donor cow, the embryo can be frozen and later thawed and transferred to a recipient cow.

Under the lease, TCR agreed to place the cow in its...